Pacific Grove

Question 1: Based on the company’s forecasted financial statements, can the company quickly comply with the banks requirements? It depends on what you consider quickly. If the deadline is to only to have a plan ready by June 30th, 2012 then it looks like they can come pretty close without implementing any major changes. Just by following their expected future growth plans they will almost reach the requirements of the bank within 4 years. Using the information provided from their forecasted financials, by 2015 Pacific Grove will reach a 55% ratio of interest/bearing debt to total assets and their equity multiplier will be 2. 7. (See Exhibit 1) Depending on how stringent the bank is this may not be quick enough of a timeline or progressive enough of a plan. If they want these figures lowered to the required levels by 2012 then Pacific Grove must do something more aggressive reduce interest bearing debt levels. The company should explore ways to reduce its need for working capital financing. They should see if there are ways of improving their supply chain efficiency and forecasting so that they can reduce their inventory levels.

They should look to negotiate with suppliers to reduce the rate they are paying for inventory. Pacific Grove should also see if they can extend the length of their accounts payable. Even if they have to pay a slight price premium, if the rate(APR) is less than what the banks are charging them in interest, it could help to both save money and reduce their capital needs. They should also see if they can adjust the credit policy terms with their customers to shorten the number of days before payment.

By reducing receivables and increasing payables they should be able to reduce their financing needs from the bank in notes payable and thus lower their interest-bearing debt. It is unlikely that even with changes in working capital structure they will be able to reduce their debt within a year. Raising funds by selling common stock to pay-off some of their interest bearing debt may be necessary in order to quickly comply with the banks requirements. My suggestion however would be to acquire the other company which has better debt structure.

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When the two companies are financial are combined Pacific Groves ratios will be under those required by the bank. Exhibit 1: 2. Should the new television program be produced and sponsored by Pacific Grove Spice? If yes how the necessary investment should be financed? I would say no. At first glance the new investment looks good. The upside of the investment is that it would increase the company’s sales, profits, and cash flow above their currently expected levels. Despite this upside it also significantly increases the yearly net working capital investment.

The additional funds needed to pay for additional working capital means that the project has negative cash flow for both year 0 and year 1. Pacific Grove would really need to borrow or raise a total $2,573,118 to initially start and fund the venture before positive project cash flows start. If we are only looking at the financial implications of investing in the company using the expected IRR and NPV we may be fooled into thinking this new television program would be a great investment. Even if our WACC were 20%, we can expect the NPV of the project to be $1,716,414.

When we look at discounted payback, however, we see that at a WACC of 20% the project payback period would be a little over 4 years and even the simple payback period is 3 years (see exhibit 2). This demonstrates that there is significant risk that the project investments may not be paid off, especially if actual performance is worse than expected. The most important issue currently facing the company is to reduce its interesting bearing debt so that it can continue to receive financing from the bank to support operations and growth.

Investing in a project with a payback period of 3 years or longer would not be a wise decision as it would initially raise the level of interest bearing debt unless funded through the selling of equity. Although there may be some synergies between the television network and Pacific Grove which could help to promote their brand, it may also take away needed focus from their core business and lead to a poorer performance and erosion of its competitive position in the market.

Pacific Grove’s lack of experience and knowledge about producing a television show add to the level of risk of the project. If they were confident that the investment will work the only viable option to raise capital while not increasing debt would be to sell shares in the company. This may not please current shareholders as they would face dilution in both the value of their shares and their percentage of ownership in the company. Exhibit 2: 3. Should the company issue new common stock to the external investment group?

No, I don’t think they should issue the stock. If they decide to issue shares they will lose some percentage of their company control. In fact, Peterson and the Founders will go from controlling a total of 32% of the company to only 23. 8% meaning that the investment group would actually have more control of the company than the founders at 25. 6%. (See exhibit3) Although the share price will only drop slightly to $31. 30, the dilution of shares and drop in stock price may displease current shareholders.

The market may respond by the further selling off of existing shares dropping the stock price more and further hurting the company’s financial status. Another problem with issuing the common stock is that although it will provide access to capital which they can use to pay off interest bearing debt If the bank requires the company to lowers its debt levels within the next year and no other banks are willing to lend, then issuing the common stock may be seem like the only viable option to quickly meet the bank’s lending requirements.

I would argue, however, that acquiring High Country Seasoning company would be a better choice as it will also resolve the debt issues while also providing other synergies and not lowering the stock price of the company. Exhibit 3: 4. Should Pacific Group Spice acquire High Country Seasonings? Yes. Acquiring High Country Seasoning would help to do several things. First because of the company’s better financial debt structure will improve Pacific Spice Groups overall debt structure upon merging.

The deal would not require the issuance of debt and would not lower the company’s current stock price. The two companies also operate in the same business line. This should help them to become a stronger player in the market by capturing more market share in the industry. There should be some cost savings because of economies of scales and the ability to leverage both companies’ assets. The only question remaining is whether the purchase price is greater than the estimated value of the company. Exhibit 4: Exhibit 5:

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